Trading Educators Blog
Hey Joe! Which indicators work for real trading tactics?
Have you ever noticed that my entries and exits are based on price levels—actual price bars? I use actual price data to determine most of my entries and exits. There is no better technical indicator than price itself.
Think about it for a minute. You are making a mistake if you use indicators for entries and exits because every indicator is based on price action. Nothing will register on an indicator until price itself makes some kind of movement.
When you look at the market through an indicator, you are looking at it through a colored lens. Every indicator acts as a lens that will give you a different view, but the clearest view comes when you use no indicator at all. The clearest indication of price action is price itself.
Another thing to think about indicators: There is no such thing as a leading indicator, at least not in the purest sense of the word. How can something lead when it must always lag? Yes! I know, you're going to tell me about divergence in an indicator. However, there can never be divergence in an indicator unless there is first divergence in the price. It's just that you must look closely to see that prices are no longer moving the way they were. An indicator may show that more clearly.
Indicators do have the ability to show things not easily seen in the price action. For example, the Bollinger Bands are able to show where two Standard Deviations are located relative to a moving average. I can only guess where that is with the naked eye.
Essentially, there are two kinds of indicators: 1) lagging indicators. 2) setup indicators.
Lagging indicators such as moving averages can identify specific market conditions, like trend. The can act as guides as to the correct direction of prices.
Setup indicators tell me specifically where to enter or exit the market, and where to place my stop loss and profit targets. I have other ways of obtaining this information, but in this article that's as far as I can go without this turning into a trading manual. Let's face it, I can't tell you about any specific indicators that will work for your real-life trading tactics. I would have to go into a lengthy discussion of how many bars to use for the indicator in conjunction with the market condition, taking into account your risk tolerance, your trading objectives, etc.